14-1626 Chong v. Chang



### UNITED STATES COURT OF APPEALS **FOR THE SECOND CIRCUIT**



## SUMMARY ORDER

**R ULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT**  **. C**  **ITATION TO A SUMMARY ORDER FILED**
**ON OR AFTER J** **ANUARY 1,**  **2007, IS PERMITTED AND IS GOVERNED BY**  **F EDERAL**  **R ULE OF**  **A PPELLATE**  **P ROCEDURE**  **32.1 AND THIS COURT**  **’ S**  **L OCAL**  **R ULE**  **32.1.1. W**  **HEN CITING A SUMMARY ORDER IN A**
**DOCUMENT FILED WITH THIS COURT ,**  **A PARTY MUST CITE EITHER THE F**  **EDERAL A** **PPENDIX OR AN**
**ELECTRONIC DATABASE (**  **WITH THE NOTATION “**  **SUMMARY ORDER ”).**  **A PARTY CITING A SUMMARY ORDER MUST** 
**SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL .** 
**At a stated term of the United States Court of Appeals** 1 **for the Second Circuit, held at the Thurgood Marshall United** 2 **States Courthouse, 40 Foley Square, in the City of New York,** 3 **on the 3 rd** **day of April, two thousand fifteen.** 4 5 **PRESENT: DENNIS JACOBS,** 6 **DENNY CHIN,** 7 **Circuit Judges** , 8 **ELIZABETH A. WOLFORD,** 9 **District Judge**

**.** ***** 10 11 - - - - - - - - - - - - - - - - - - - -X 12 **MICHAEL K. CHONG,** 13 **Appellant ,**  14 15 **-v.- 14-1626** 16 17 **KWO SHIN CHANG, STEVEN WONG,** 18 **Appellees**

**.** ****** 19
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*The Honorable Elizabeth A. Wolford, United States District Judge for the Western District of New York, sitting by designation.

**The Clerk of Court is directed to amend the official caption as set forth above.**FOR APPELLANT:** MICHAEL K. CHONG, Fort Lee, New 1 Jersey. 2 3 **FOR APPELLEES:** MORTON S. MINSLEY, New York, New 4 York. 5 6 Appeal from a judgment of the United States District 7 Court for the Southern District of New York (Forrest, J. ). 8 9 **UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED** 10 **AND DECREED**that the judgment of the district court be 11 **VACATED AND REMANDED**

. 12 13 Michael K. Chong appeals from the judgment of the 14 United States District Court for the Southern District of 15 New York (Forrest, J. ), granting appellees’ motion for 16 attorney’s fees and costs as a sanction for pursuing a 17 baseless third-party complaint against appellees, Kwo Shin 18 Chang and Steven Wong

. We assume the parties’ familiarity 19 with the underlying facts, the procedural history, and the 20 issues presented for review. 21 22 Chang, Wong, and others filed an action against Chong’s 23 client, Vihn Ly, asserting claims under the Fair Labor 24 Standards Act (“FLSA”) and New York Labor Law (“NYLL”) in 25 connection with the operation of a restaurant, Neo Sushi. 26 Ly’s answer asserted counterclaims against Chang and Wong 27 for fraud and breach of an alleged partnership agreement 28 among Ly, Chang and Wong to purchase and own Neo Sushi. An 29 amended complaint was filed in which Chang and Wong were no 30 longer plaintiffs; Ly asserted the same claims against Chang 31 and Wong, brought in the form of a third-party complaint. 32 33 After a trial, the district court entered judgment in 34 favor of Chang and Wong, concluding “that there was a 35 failure of proof as to essential elements of both claims.” 36 Special App. at 5. Chang and Wong sought sanctions in the 37 form of fees and costs pursuant to Federal Rule of Civil 38 Procedure 11, 28 U.S.C. § 1927, and the inherent power of 39 the court. The court determined sanctions were “warranted 40 under all three asserted grounds.” Id. at 7. 41 42 We review a district court’s award of sanctions, 43 whether under Rule 11, § 1927, or its inherent power for 44 abuse of discretion. SeeStreetEasy, Inc. v. Chertok , 752 45 F.3d 298, 306-07 (2d Cir. 2014) (discussing Rule 11 46 sanctions); Enmon v. Prospect Capital Corp. , 675 F.3d 138, 47

2143 (2d Cir. 2012) (discussing § 1927 and the court’s 1 inherent power). 2 3 Chong argues that the district court erred in imposing 4 sanctions pursuant to Rule 11 because Chang and Wong failed 5 to comply with the procedural requirements of the Rule’s 6 safe harbor provision. The district court found that 7 “sufficient notice” was provided because opposing counsel 8 warned Chong by e-mail “about the possibility of attorneys’ 9 fees if he had to sit through trial.” Special App. at 8. 10 But the “safe-harbor provision is a strict procedural 11 requirement” and “[a]n informal warning . . . without 12 service of a separate Rule 11 motion is not sufficient.” 13 Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce 14 Factory, Ltd. , 682 F.3d 170, 175 (2d Cir. 2012) (per 15 curiam). The e-mail sent to Chong in this case does not 16 satisfy the requirements under the Rule. 17 18 Although the court set out the applicable standards for 19 sanctions under Rule 11, § 1927, and the court’s inherent 20 authority, it did not engage in “separate consideration of 21 the available sanctions machinery[, which] is not only 22 warranted, but necessary for meaningful review.” United 23 States v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen 24 & Helpers of Am. , 948 F.2d 1338, 1346 (2d Cir. 1991). A 25 district court should “treat[] and determine[ each 26 authority] separately” and the court’s “resulting findings 27 must appear with reasonable specificity in terms of the 28 perceived misconduct and the sanctioning authority.” 29 MacDraw, Inc. v. CIT Grp. Equip. Fin., Inc. , 73 F.3d 1253, 30 1262 (2d Cir. 1996) (internal quotation marks omitted). 31 32 The court’s opinion lacks the specific findings 33 required to support the imposition of sanctions under either 34 its inherent authority or § 1927, and remand is therefore 35 warranted. Schlaifer Nance & Co. v. Estate of Warhol , 194 36 F.3d 323, 338 (2d Cir. 1999). While it is true that “[b]ad 37 faith can be inferred when the actions taken are so 38 completely without merit as to require the conclusion that 39 they must have been undertaken for some improper purpose,” 40 id. (internal quotation marks omitted), the court’s 41 determination that “there was absolutely no merit to the 42 claims asserted” is not sufficient. Special App. 3 n.3. 43 44 The standard requires “clear evidence that (1) the 45 offending party’s claims were entirely meritless and (2) the 46 party acted for improper purposes.” Revson v. Cinque & 47

3Cinque, PC , 221 F.3d 71, 79 (2d Cir. 2000) (internal 1 quotation marks omitted). The court’s only findings are 2 that: “third-party plaintiffs failed to introduce evidence 3 sufficient to support even a prima facie” claim; the 4 “failure[] of proof [was] . . . powerful evidence of the 5 fact that the complaint was meritless from the start;” and 6 “[t]his obvious lack of merit gives rise to precisely the 7 inference that . . . the third-party complaint was filed 8 solely to pressure plaintiffs into withdrawing meritorious 9 FLSA and NYLL claims.” Special App. at 7-8. These findings 10 collapse the relevant standard into a single requirement 11 that the court find the claims baseless. But, as the 12 district court recognized, “one of the ways this could 13 [have] play[ed] out is with a wage and labor claim that 14 there was a period of time during which the partnership 15 operated where there were monies due and owing to the 16 employees and that [the] debt, if any, [was] owed by the 17 partnership” as opposed to by Ly alone. Appellant App. at 18 71-72. 19 20 For the foregoing reasons, and finding no merit in 21 Chang and Wong’s other arguments, we hereby **VACATE** and 22
**REMAND** the judgment of the district court. 23 24 FOR THE COURT: 25 CATHERINE O’HAGAN WOLFE, CLERK 26 27

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